Lloyds Banking Group (LLOY) reported strong earnings last Friday, boosting investors’ confidence in the company. Lloyds has topped the list of the most popular stocks on Morningstar.co.uk for the last 19 months in a row, as the bank’s fortunes have steadily increased.
Coming second on April’s most popular list was fertilizer provider Sirius Minerals (SXX), followed by energy giant BP (BP.) which has today announced tripled profits for the first three months of 2017.
Utilities stocks were also on Morningstar readers’ radar last month; their shares prices fell as the Conservative Party announced plans to cap energy bills if they win the General Election in June. National Grid (NG.) and Centrica (CNA) came fifth and ninth in the most watched list last month.
The FTSE 250-listed infrastructure maintenance service provider Carillion (CLLN), financial company Legal & General (LGEN), pharmaceuticals company GlaxoSmithKline (GSK), telecoms stock BT Group (BT.A) and retailer Tesco (TSCO) were also on the most popular stocks list.
Utilities Stocks Fall on Tory Price Cap Pledge
Shares in utility stock Centrica fell 3.5% when the Tories confirmed that energy price caps would be in their manifesto on April 24. The stock has since rallied slightly. Current Prime Minister Theresa May previously commented that it was “unfair” two thirds of British households were stuck on the most expensive energy tariffs.
Regulation is a key restriction to utility companies’ profits in the UK, according to Charles Fishman, Morningstar equity analyst. Regulators seek to keep customer bills low, while the company tries to increase profits.
Centrica is a vertically integrated utility based in the U.K. and its British Gas business unit is the largest residential supplier of natural gas services in Britain, said Fishman. Centrica also owns the Rough natural gas storage facility, representing 70% of the UK's total storage capacity, said Fishman. Public concern about the environment has resulted in a significant move to renewables and conservation in the UK, which could further diminish consumption of natural gas. The decline would contract operating earnings at Centrica's downstream and upstream businesses, said Fishman. Fishman does not expect a dividend increase in Centrica until the 2018 dividend.
National Grid, on the contrary, is benefitting from its investment in ageing energy transmission networks and renewable energy in the US and the UK, said Travis Miller, director of utilities equity research at Morningstar. National Grid recently agreed to sell its UK natural gas distribution business, said Miller. Miller thinks National Grid will easily meet management's target to increase the dividend at or above the inflation rate for the foreseeable future, however its dividend growth has been underwhelming at 2% in 2015 and 2016.
BP Reports Healthy Profit Growth
This morning oil company BP reported a healthy profit for the first three months of the year, thanks to an increase in oil prices. BP reported a replacement cost profit of $1.41 billion in the first quarter of 2017. That is comparable to the fourth quarter of 2016 when BP made a profit of just $72 million and the first quarter of 2016 when it made a loss of $485 million.
“Our year has started well. First quarter earnings and cash flow were robust,” said Bod Dudley, chief executive of BP.
“The result for the first quarter was primarily affected by adverse foreign exchange effects and higher oil prices,” the company’s statement read.
Lloyds Gets Off to a Strong Start
Last Friday, Lloyds reported profit doubled to £1.3 billion despite the fact the bank had to book a further £350 million towards the payment protection insurance claims, said Derya Guzel, Morningstar equity analyst. Lloyds is up 10.7% year to date.
After its restructuring, Guzel believes the bank’s business model is well-positioned for the challenges that Brexit poses to the operating environment and possible changes in the regulatory framework.
Guzel also expects the bank’s profitability to continue, maintaining its dividend policy of a pay-out ratio of at least 50%.
Steve Davies, manager of the Jupiter UK Growth Fund echoes Guzel’s views, saying that Lloyds’ profits have really improved dramatically over the last five years, and he expects that should come back increasingly to shareholders.
Richard Buxton, manager of the Silver Rated Old Mutual UK Alpha fund told Morningstar recently that he expects Lloyds to pay a 10% dividend.
“Lloyds is my favourite UK bank, on our calculations soon it will be paying a 6p dividend on a stock worth 64p. That is a 10% yield. That is unsustainable so you will get a re-rating of the share price,” he said. “Lloyds offers income and growth.”
UK Fertiliser Continues to See Growth
Since the start of the year shares in the UK-based fertiliser Sirius Minerals have risen by 31%. As the company’s York polyhalite project in the UK remains on schedule and within budget, the positive news supported the share prices.
Sirius is developing a huge polyhalite mine in York, and the company has completed the first phase of financing for the project to begin construction, while talks to finalise stage two are underway with six financial institutions.
"We are making good progress with the development of the Woodsmith Mine and associated infrastructure, having successfully secured around £1billion in November 2016 in our stage one financing, and we are pleased to be progressing in line with schedule and budget," said the company’s managing director and chief executive Chris Fraser.
Jupiter’s Davies owns about 7% of Sirius Minerals as he believes this company is “a proper patient long-term investment with a really exciting upside”.
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